How to Calculate Repayments of a Cash Loan
If you want to avail of a cash loan in the Philippines, you might want to have a basic understanding of how the cash loan costs and repayments are calculated. We understand that many people who need a cash loan, need it NOW, and don’t have time to research how it works in detail. But if you are not in a rush, this article is for you.
There are a number of companies, both public and private (see CashLoan.com.ph), that extend cash loans to borrowers in need. These companies differ in their offering as to the minimum and maximum amount granted, repayment terms and period, processing charges, loan security (collateral and/ or insurance), and other charges.
Let us learn then how official how lending companies calculate these amounts in the hope that you too, as borrower may be better-informed as to make the right decision where to best source your much-needed cash.
The first example is from a loan granted by the Manila Teachers Savings and Loan Association, Inc. (MTSLA), the leading private lending company serving teachers in the Department of Education.
The starting point in any loan computation is the loanable amount, which is usually a multiple of the monthly basic salary of the borrower. Some lending companies who provide Cash Loans will offer you a cash loan total of your monthly salary multiplied by 2x, or 3x, and so on.
For example, if your total monthly salary is Php20,000, your cash loan would be a total of Php40,000 if the lender approved you for a cash loan that was 2x your monthly salary.
The second most important element of your cash loan that will determine what your repayments will be, is the length of time that you are given to repay the cash loan.
If you’re required to repay the cash loan within 3 months, your weekly, bi-monthly or monthly repayments will be higher than they would be if you chose to or were given the option to repay your cash loan over a 12 month timeframe.
The next item is the interest, which for example here is 0.5833% monthly, or 7% per annum. This interest rate is determined by the lending company based on the allowable legal rates, prevailing market rates, and as regulated by the Bangko Sentral ng Pilipinas, the country’s central bank.
Example For a Loan Amount of Php209,000
Please note: this is an example only. You should not assume that these figures will be the same for you. You will need to review your own loan offer and not base any decision to get a cash loan or any loan based on the example repayment calculations that are provided below.
The repayment period is now the next significant detail to account for. This depends on the preference of the borrower, with the agreement of the lender. In our case, the loan was to be repaid in 3 years or 36 monthly instalments.
With the loan amount, the interest rate, and repayment period now determined, it is now time to compute the monthly repayments. For this, you can use the PMT function of Microsoft Excel, which computes the loan payment based on uniform payments and an unchanging interest rate.
For this function, you need to input the following: interest rate for the loan under Rate; the total number of payments for the loan under Nper; and the loan principal amount under Pv. In our example, I inputted 21%/36 under Rate (21% is taken from 7% multiplied by 3 the repayment term, while 36 is the number of months in 3 years), 36 under Nper, and 209000 under Pv or principal.
The result is a monthly instalment of Php 6,453.31. The whole repayment is thus Php 232,319.00 or a total loan interest of Php 23,319.00 for 3 years. This amounts to annual interest of Php 7,773.00 or a monthly Php 647.75.
Now comes the tricky part. The monthly interest may be small at 0.5833% but the lending company charges other fees that are to be deducted from the gross loan amount of Php 209,000.
In the same example, MTSLA, Inc. deducts Php 9,045.00 for “service and collection” under finance charges. Under non-finance charges, a “processing fee” of Php2,090.00 or 1% or the gross loan amount is deducted in addition to the old balance still unpaid by the borrower as of the time of loan application.
Interestingly, both the “service and collection charges” and “processing fee” are categorized under “other charges”. These charges are essential because lending is a business which employs people such as those managers, office staff, security services, and collectors, in addition to the taxes and government fees to be paid.
Lending is also a risky business and some borrowers end up not paying their dues. If the non-interest charges are actually added to the interest, the total amounts to about 16% of the gross loan.
If you think the computation above is mind-boggling, look at how hard it is to figure out how the next example arrived at the numbers.
For a loan of Php 2000.00 at CARD Bank, Inc., the popular microfinance lending company in the country catering to mostly poor rural folks, the promissory note lists the following information: contractual rate of 4.23% monthly interest; effective interest rate of 4.47%; total interest of Php 560.00; a charge called LRF at Php 30.00; payment term of 50 weeks at Php 55.00 each.
A simple multiplication of Php 55.00 x 50 gives a total repayment of Php 2,750.00 or an interest of Php750.00 which is different from the stated total interest of Php 560.00.
The promissory note looks a lot like a difficult mathematics problem given two different interest repayments of 28% and 37.5% of the principal loan. When you are the borrower, bear in mind this information and ask for clarification. As shown above, one should prudently steer clear of borrowing from CARD Bank and similarly-modelled companies.
In sum, if you are employed in the public sector, it is best to secure your loans from either the Government Service Insurance System (GSIS), PAG-IBIG, or Landbank of the Philippines with annual interest rates of between 6%-12%, 10.75%, and 9.97%, respectively. The interests are lower probably because of the lower risks involved and automatic payroll deduction of the repayments.
If you are in the private sector, it is best to avail of loan from the Social Security System at 10% per annum, though such loan can be up to a maximum of only Php 15,000.00. Big banks such as Banco de Oro, Metrobank and Bank of the Philippine Islands charge interest starting at about 25% annually. Instead, look for smaller banks like thrift and rural banks which offer lower interests.
Remember to look not only at the at the interest per se but include in your computation the effective interest rate, meaning the additional charges like processing, service, and collection fees. Also, there are other trade-offs for lower interests, like smaller loanable amounts.